Hangover cure

'Swire prince' are words often whispered in the wake of David Turnbull, an acknowledgement of his rapid rise through the management strata of the Swire Group. His 21 years of experience at Swire have been tested severely over the last 12 months, however, since he inherited one of the Group's most prestigious kingdoms, Cathay Pacific Airways, on the eve of what has turned out to be the airline's bleakest year.

Turnbull joined Swire in 1976 when he was just 21 years old. By the time he was 28, he was already manager international affairs at Cathay and by 30, commercial director of Swire Group Australia and managing director of its NGAL Shipping Line.

Turnbull returned to Cathay in 1993 and it was no hand of chance that selected him to oversee the airline through its most sensitive period ever - the handover of Hong Kong from colonial British rule to Chinese authority. In typical self-effacing manner, Turnbull dismisses any notion that he might have been hand-picked for this job because of his personal management style. 'I don't know why I was picked,' he says, as if the thought had not occurred to him. But he does admit to a devote loyalty to Cathay - 'good people, really good people' - as well as a love of managing them and a strong and totally trusting relationship with the airline's chairman, Peter Sutch.

What Turnbull did not foresee, however, was the turbulent time ahead of him. Since he was appointed as Cathay's managing director in December 1996, Turnbull has ordered a partial fleet shutdown after problems with the Rolls-Royce Trent engine; steered the airline through the handover period; and seen passenger load factors slump and profits tumble largely as a result of that handover.

Some might blame all this on the Chinese superstition of feng-shui and advise Turnbull to furnish his office with more pot plants. Turnbull himself is taking a more pragmatic approach. He acknowledges that 1997 has been a 'terrible year' and he does not expect 1998 to be much better. So, in an attempt to lure nervous tourists back to Hong Kong, he has announced a cut-price promotion for January and February that he hopes will fill the seats, albeit at a cost that will do nothing to improve Cathay's financial woes in the short term.

Turnbull admits, however, that the problems are not just about load factors. With the currency crises running rampant throughout southeast Asia, Hong Kong has become an expensive place to do business, even by Hong Kong standards. Turnbull says the airline has to reduce its costs further and he is looking for increased staff productivity as part of that plan.

Palatable solutions

He also expects cost savings to accrue after the airline moves all its operations to a single site next year at the new Chek Lap Kok airport, although the irony here is that the airline's landing fees could increase by as much as 70 per cent. Although the Hong Kong Airport Authority has gone some way towards meeting calls for lower landing fees (see newsline), Turnbull says that negotiations continue for more palatable solutions.

And through all these day-to-day dilemmas, Turnbull cannot afford to overlook the long term. There has been much speculation this year over Cathay's alliance plans, and Turnbull now says he expects some kind of decision to be made 'over the next year'. He also wants to step up the airline's presence in the US market, a desire that will play a key part in his alliance decision.

But the alliance question is tomorrow's problem. With almost exactly one year as managing director behind him, Turnbull's more pressing concern is the here and now. His summary of the past year is frank and not pretty. '1997 has been a terrible year,' he says. 'It didn't start off too bad. The months of January to April were OK, but since May it has gone from bad to worse and for a whole host of reasons. First, there was what we are calling the post-handover blues. Tourists have stayed away from Hong Kong, and the Japanese have been particularly absent this year. Second, because of the major devaluations of currencies in Asia, Hong Kong has become a very expensive place. Generally, it has been a pretty tough year.'

The downturn in tourism was not predicted, says Turnbull. In fact, most people had predicted a boom similar to the one that occurred in 1996, helping to push Cathay's profits up by 28 per cent over 1995 to US$488 million. Load factors averaged almost 73 per cent, an increase of 1.8 percentage points.

Tourism in Hong Kong jumped by around 15 per cent in 1996, but the Hong Kong Tourist Association has since found out that many people regarded that year as a 'last chance' opportunity to visit before the former British colony was placed under Chinese rule. In the all-important Japanese market, for instance, tourist agents were advising customers to fit in a visit to Hong Kong '. . . before it's too late'.

The HKTA has therefore spent much of this year sending out the message: 'One country, two systems. It's business as usual in Hong Kong'. But business has been far from usual, with tourism 35 per cent down on the previous year for July, the handover month, and 24 per cent down in August.

The effect on Cathay has been severe. Turnbull, who last year spoke with confidence that post-handover Hong Kong would remain exactly the same as colonial Hong Kong, admits that few were prepared for the tourism slide. 'Frankly, it surprised us all,' he says.

Turnbull says Cathay's overall tourist traffic is down by an average of 25 per cent, but Japanese traffic is down by 40-50 per cent. 'The first and business cabins have held up very well, which is about half of our business. But a 25 per cent hit on the other half of your business is pretty hard to take. What we have to do is to show the media and the travel trade that Hong Kong is exactly the same as it was before.'

Turnbull, somewhat exasperated by how slowly that message has filtered through, has taken a step which he admits will be something of a costly gamble in the near term. On 17 November the airline was to announce a worldwide tourism promotion package that would not only offer the cheapest fare to Hong Kong, but would also include hotel accommodation and discount coupons for restaurants. And a partner travels for free.

Turnbull estimates that the deal, which will run from early January through mid-February, will allow a couple from London to take a four-night break in Hong Kong for around US$350 each. The promotion will be called Cathay's Super Offer and will be available from every airport that Cathay serves to Hong Kong. 'We are saying that people will say to themselves that for that price they might as well go to Hong Kong. We want to do it just to get people moving again and coming to Hong Kong and seeing that it is exactly the same. Then they will go home and tell their friends.'

Turnbull knows there are no guarantees, but the 1997 financial figures compel him to be proactive. The airline eked out a US$138 million profit on $2,022 million in revenues for the six months ending 30 June and forecasts for the full year are similarly weak, perhaps as low as $260 million. Turnbull has no illusions of a quick turnaround. '1998 will be a very tough year and we have to work very hard to increase the tourist market. We have got to be realistic.'

What he is adamant about is that the downturn will not affect planned deliveries of new aircraft. Next year, Cathay is due to receive four B777-300s from Boeing and five A340s plus an A330 from Airbus. 'Those aircraft will come as planned,' says Turnbull. 'But we are reviewing any future orders after that.'

Some retrenchment

Nor does Turnbull expect any job cuts. 'We have got to be more efficient, frankly, and improve staff productivity. We are not anticipating any job cuts, but there will be some retrenchment through outsourcing. That also means not recruiting or replacing people for a time. Staff were told that straight-up. It has come as a bit of a shock to everyone, but it is a question of doing the right things about it.'

The most difficult group of employees to negotiate the 'right thing' with has been the airline's pilots. 'We have very good pilots, but on the whole they are also very well paid.' says Turnbull. 'Those on the A-scale are on very good packages and we have had to say to them that in the current environment we are not able to offer any pay increases. We need to improve the rosters and get better efficiencies, which they themselves would like to see, so that suits both sides because it improves their working lives as well. But there are no formal negotiations taking place.'

Turnbull is hopeful that the airline's move to the new Chek Lap Kok Airport, due to open in April 1998, will allow for some cost savings in operations, although this will take time to happen as operations will be transferred to the new site, christened Cathay Pacific City, progressively between April and September. 'I am planning to change the way we operate because we will be based in one location,' says Turnbull. 'This will range from non-duplication of functions which was bound to happen when you have 20 different locations, as we have now, down to the small things. For example, we have some 180 fax machines now and we may only need 30 on the new site. The same goes for photocopiers and telephones; departments within departments. In Hong Kong, the offices can only be five miles apart, but it can take you an hour to get between them.'

The downside will be the higher landing fees - Turnbull estimates that, even though recent negotiations have reduced fees to a 'more reasonable level', it will still cost Cathay some 60-70 per cent more to land a B747 at CLK compared with the existing Kai Tak airport, and fees for an A330 will be 25-30 per cent higher. 'Nothing is finalised yet and negotiations are still going on,' says Turnbull. 'We are looking at the various elements that make up those charges and we have been talking to the government about perhaps putting some of those charges on the ticket, perhaps in the form of a building fee.'

Amid all the problems of the past year, Cathay has also been at the centre of much speculation about its alliance plans. Turnbull says that the airline's intention to build Chek Lap Kok into a major Asian hub will be important in Cathay's alliance plans, as will the need to step up presence in the US. 'We have not decided to do anything yet - we are still looking at it all,' he says. 'We are looking at all alliance options, including the option to do nothing. I know there has been a lot of speculation about us and the Star Alliance, and I think it's fair to say that we are interested and it is a possibility. In the long run - over the next year - we will do something. I think it's more likely that we will choose an option to do something rather than nothing, even if it's only a minor tie-up with somebody.'

Cathay has been weighing up the pros and cons of the alliance game for many months now and is clearly cautious. 'Alliances have their pluses and minuses,' says Turnbull. 'They are bound to put more pressure on you. The market outside of Hong Kong has been strong lately, but no doubt sooner or later there will be another downturn and one wonders what will happen in the alliances then.'

But Turnbull seems to be edging towards the pluses. 'We want to make Chek Lap Kok a major hub, of course, so the more airlines that use it the better. If an alliance helps us to achieve making Chek Lap Kok into a bigger and better hub, then that would be good. I believe it probably could and can. And I am not ruling out the possibility of forming our own alliance,' says Turnbull. 'An alliance might also help us in the US and that's a key consideration,' he adds.

Nonstop to the US

Turnbull describes Cathay as a 'small player' in the US and he would like to see that change. 'We have only two routes, to New York and Los Angeles, and both are doing well,' he says. 'We have seven routes to Europe and one would think that the US is a bigger market than all of Europe combined. We currently go to New York via Vancouver and we would like to go nonstop over the next two or three years if we can get the polar routing. In 1998 we are increasing frequency to LA, going twice- daily nonstop.'

Within the China market, Turnbull does not anticipate any negative impact now that Cathay and its regional subsidiary Dragonair are two of a number of Chinese major carriers. 'We have always competed with the Chinese carriers to some extent,' he remarks. 'China is a huge market and as far as we are concerned, the more aviation travel that happens, the happier it will be for everyone. We are not losing anything.'

That also goes for ownership status. Turnbull is adamant that there are no foreseeable changes in the current situation, in which Swire Pacific holds a 43 per cent stake and Chinese government controlled Citic Pacific a 25 per cent stake. 'Nothing has changed, nor will it,' he insists.

Turnbull is equally certain that 1998 will be at least as difficult as 1997 has been, but allows himself some optimism after that. 'Let's just hope for 1999,' he says.